Sterling climbed to its highest level in nearly a month against the US dollar on Friday and also reached a one-year high against the euro, as investors assessed how central banks are likely to respond to higher energy prices resulting from the conflict between the United States and Iran.

The pound rose to $1.345, its highest level since June 15, before trimming some of its gains to trade about 0.1% higher.

Meanwhile, the euro slipped to 85.18 pence, its weakest level against sterling since late June 2025, before recovering to trade little changed.

Analysts said sterling's strength in recent weeks has been supported by several factors, including stronger-than-expected UK economic growth, increased foreign acquisitions of British companies, easing political uncertainty, and expectations surrounding Bank of England monetary policy.

Barry van der Laan, Head of FX Strategy at Monex Europe, said comments from Bank of England Chief Economist Huw Pill late on Thursday, indicating that interest rates would need to move higher, provided additional support for the British currency.

"Those remarks reinforced the market's view that the Bank of England has less room to ignore inflationary pressures than either the US Federal Reserve or the European Central Bank," he said.

However, he added that, in the absence of major UK economic data on Friday, sterling is likely to take its direction from movements in the US dollar, oil prices, and developments in the Middle East.

IMF upgrades UK growth outlook as political developments support sterling

The International Monetary Fund this week upgraded its forecast for UK economic growth, projecting the economy to expand by 1.0% in 2026.

The IMF said the outlook for the UK economy, which relies heavily on imported energy, had improved following the agreement reached between the United States and Iran in June and the subsequent decline in oil prices.

The fund also expects the UK to be the third-fastest growing economy in the G7 this year, behind Canada and the United States, outperforming the eurozone economies.

Even so, oil prices have risen around 5% this week following renewed exchanges of strikes between the United States and Iran, alongside Washington's decision to revoke a waiver that had allowed certain transactions involving Iranian oil.

Brent crude was last trading near $76 a barrel, although it remained well below the peak of $126 reached in April.

On the political front, former Greater Manchester Mayor Andy Burnham took a significant step toward becoming the UK's next prime minister after securing overwhelming backing from Labour Party members of Parliament on Thursday to succeed Keir Starmer.

Some analysts believe the clearer leadership outlook, together with Burnham's pledge to maintain fiscal discipline, has provided modest support for sterling. However, they cautioned that UK financial markets could become more volatile once he begins outlining the details of his economic agenda.

Gold prices edged higher in European trading on Friday, extending gains for a second consecutive session, supported by the ongoing weakness in the US dollar as military tensions between the United States and Iran continued to ease.

Despite Friday's advance, the precious metal remains on track for a weekly loss after this week's surge in oil prices reignited inflation concerns and boosted expectations that the Federal Reserve will raise interest rates at least once this year.

The Price

• Gold prices rose 0.3% to $4,134.86 an ounce, from the opening level of $4,123.44, after touching an intraday low of $4,108.81.

• At Thursday's settlement, gold gained 1.15%, posting its first daily advance in four sessions, supported by a weaker US dollar and softer oil prices.

Weekly performance

So far this week, which officially concludes with Friday's settlement, gold prices are down around 1.0%, putting the metal on track for its fifth weekly loss in the past six weeks.

US dollar

The dollar index fell 0.3% on Friday, extending losses for a third consecutive session and reflecting continued weakness in the US currency against a basket of global currencies.

The decline came as safe-haven demand for the dollar eased following successful diplomatic efforts to contain the military escalation between the United States and Iran, with both sides continuing to observe the ceasefire agreement.

Latest developments in the Iran conflict

• Military strikes between the United States and Iran have paused to allow regional mediation efforts to continue.

• US President Donald Trump warned that any further attacks on commercial vessels in the Strait of Hormuz would trigger "much stronger" military strikes.

• A US official revealed that "technical back-channel talks" between Washington and Tehran over the nuclear issue are still ongoing.

• Traffic through the Strait of Hormuz slowed sharply, with only 13 oil tankers and commercial vessels transiting the waterway over the past 24 hours.

US interest rates

• According to CME Group's FedWatch tool, markets are currently pricing a 78% probability that the Federal Reserve will leave interest rates unchanged at its July meeting, with a 22% probability of a 25-basis-point rate hike.

• Markets are also pricing a 19% probability that the Fed will keep rates unchanged at its December meeting, while the probability of a 25-basis-point hike stands at 81%.

• Investors continue to monitor incoming US economic data and comments from Federal Reserve officials for fresh clues that could reshape those expectations.

Gold outlook

Tim Waterer, Chief Market Analyst at KCM Trade, said gold is currently trading in a consolidation range following Thursday's gains, as traders remain hesitant to bet on further upside amid lingering uncertainty over US-Iran relations.

Waterer added that he expects gold to continue attracting buyers on price dips as long as oil prices remain near current levels. However, any sharp rally in crude could reignite concerns over inflation and interest rates, creating headwinds for the precious metal.

SPDR fund

Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, increased by 3.14 metric tons on Thursday, bringing total holdings to 1,005.65 metric tons, the highest level since June 25.

The euro rose against a basket of major currencies in European trading on Friday, extending its gains for a third consecutive session against the US dollar and heading for a second straight weekly advance, supported by easing military tensions between the United States and Iran in the Strait of Hormuz.

Following this week's surge in global oil prices, expectations have increased that the European Central Bank could deliver one additional 25-basis-point interest rate hike before the end of the year.

The Price

• The euro rose around 0.3% against the US dollar to $1.1461, from Friday's opening level of $1.1430, after touching an intraday low of $1.1428.

• The euro closed Thursday's session up more than 0.1% against the dollar, marking its second consecutive daily gain after the exchange of military strikes between the United States and Iran came to a halt.

Weekly performance

So far this week, which officially concludes with Friday's settlement, the single European currency has gained more than 0.25% against the US dollar and is on track to post its second consecutive weekly advance.

US dollar

The dollar index fell 0.3% on Friday, extending losses for a third straight session and reflecting continued weakness in the US currency against a basket of major and minor currencies.

The decline came as demand for the dollar as a safe-haven asset continued to ease after diplomatic efforts successfully contained the military escalation between the United States and Iran, with both sides adhering to the ceasefire agreement.

Latest developments in the Iran conflict

Military strikes between the United States and Iran have paused to allow regional mediation efforts to continue.

• US President Donald Trump warned that any further attacks on commercial vessels in the Strait of Hormuz would trigger "much stronger" military strikes.

• A US official revealed that "technical back-channel talks" between Washington and Tehran over the nuclear issue are still ongoing.

• Traffic through the Strait of Hormuz slowed sharply, with only 13 oil tankers and commercial vessels transiting the waterway over the past 24 hours.

European interest rates

• Money markets continue to price around a 10% probability of a 25-basis-point European Central Bank rate hike at the July meeting.

• This week, the probability of a 25-basis-point ECB rate hike in December has climbed to above 90%.

• Investors are awaiting additional eurozone data on inflation, unemployment, and wage growth to reassess those expectations.

The Japanese yen strengthened broadly in Asian trading on Friday against a basket of major and minor currencies, extending gains for a second consecutive session against the US dollar after the Japanese government signaled plans to encourage pension funds to increase their holdings of domestic financial assets.

Government data released in Tokyo also showed producer prices rose to their highest level in three years in June, the latest sign of renewed inflationary pressures facing Bank of Japan policymakers, reinforcing expectations of another interest rate hike in October.

The Price

• The US dollar fell 0.65% against the yen to 161.29, from Friday's opening level of 162.35, after reaching an intraday high of 162.42.

• The yen ended Thursday's session up 0.15% against the dollar, marking its first daily gain in five sessions as it continued to recover from its weakest levels in 40 years.

• In addition to bargain buying, the yen also benefited from easing military tensions between the United States and Iran.

Japanese government and pension funds

Japanese Finance Minister Satsuki Katayama said on Friday that the government will explore ways to encourage pension funds, including the Government Pension Investment Fund (GPIF), to increase their investments in domestic financial assets.

Market views and analysis

• Fabian Yeap, market analyst at IG, said: "Pension funds are enormous in size, so you can imagine the impact if there is a structural shift in how they allocate their assets."

• Yeap added: "At the moment, around 50% of their portfolios are allocated to foreign assets. Any change in that allocation would certainly generate larger flows into domestic assets. That would support the yen while also benefiting Japanese equities and bonds."

• He also noted: "With the yen trading near its weakest levels in almost 40 years against the dollar and policymakers having limited options to support the currency, addressing the issue structurally by encouraging greater investment in yen-denominated assets would provide stronger and more sustainable long-term support for the currency."

Japanese government and central bank

Economy Minister Minoru Kiuchi said on Friday that the government will not interfere with the Bank of Japan's decisions on interest rates, emphasizing that monetary policy remains solely the responsibility of the central bank.

Kiuchi added that the government is revising the wording of the monetary policy section in its annual economic plan to avoid any interpretation that it is exerting political pressure on the central bank. The revised plan is expected to receive formal government approval next week.

Japan producer prices

Data released in Tokyo showed that Japan's producer price index rose 7.1% year on year in June, the fastest increase since March 2023, exceeding market expectations of a 6.8% rise and accelerating from a 6.6% increase in May.

Japanese companies have increasingly passed on the higher costs resulting from the conflict in the Middle East to consumers, strengthening expectations that the Bank of Japan could raise interest rates once more before the end of the year.

The data followed a Bank of Japan report released on Thursday warning that the pass-through of higher input costs is accelerating and could push consumer inflation higher later this year.

Japanese interest rates

• Markets continue to price the probability of a 25-basis-point Bank of Japan rate hike at the July meeting at below 25%.

• The probability of a 25-basis-point rate hike at the October meeting has climbed to above 75%.

• Investors are awaiting additional data on inflation, unemployment, and wage growth in Japan to reassess those expectations.